This paper examines the pros and cons of gradual versus big-bang approaches toward devaluations. It presents original empirical evidence regarding output, consumption, investment and trade balances associated with gradual and big-bang devaluation episodes.
... See More + It finds that big-bang devaluations are associated with lower output, investment and consumption, while gradual devaluations are not associated with any contemporaneous drops. Five case studies of gradual devaluations are also conducted.
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Ethiopia’s gross domestic product (GDP) growth is estimated to have rebounded to 10.9 percent in FY2017. According to official statistics, Ethiopia’s annual rate of economic growth, which averaged 10.3 percent over 2005/06-2015/16 (compared with the regional average of 5.4 percent), slowed to 8 percent in FY2016 due to drought-related lower agricultural production.
... See More + With agricultural recovery, gross domestic product (GDP) growth rebounded in FY2017. The pursuit of prudent fiscal policy, with a fiscal deficit at 3.4 percent of GDP, should help keep inflation under control, providing monetary conditions remain tight in the aftermath of the devaluation of the Birr in October 2017. Key challenges relate to poor export performance (Ethiopia’s growth has been driven by investment followed by private consumption) and weak trade balance, which reflect the lack of external competitiveness and the vulnerability to terms of-trade shocks. The rising risk of external debt distress may affect Ethiopia’s access to external finance. These developments require continued policy adjustment to crowd-in the private sector and strengthen Ethiopia’s competitiveness. Part one of this Economic Update, on recent economic developments and outlook, discusses Ethiopia’s growth strategy, emphasizing the sustainability of the country’s investment-focused and export-led growth model. Part two looks at the interlinkages between manufacturing and services, with a special focus on the role of distribution services in promoting Ethiopia’s export competitiveness and eventually its structural transformation.
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Ethiopia’s remarkable socio-economic transformation over the last decade has been marked by: a reorientation of expenditure from recurrent to capital; a significant devolution of resources from Federal Government to Regions; and a clear prioritization of infrastructure spending, while protecting spending on education at four percent of GDP.
... See More + The Government of Ethiopia has also leveraged external resources to boost spending in pro-poor sectors, particularly health and social protection. As a result, Ethiopia is home to the largest social safety net program in Africa, and has also achieved remarkable health outcomes using cost effective approaches. Recent investments have seen a significant build-up of capital stock, with capital spending at sector level pointing towards increased service capacity. The current public investment-led strategy requires to be complemented by increased budgetary provisions in operations and maintenance so that new investments translate into enhanced service coverage and delivery. As Ethiopia lays the foundation to become a middle income country, and the changing global environment implies declining external assistance, it is imperative that domestic taxation activity support this transition. The current tax-to-GDP ratio is low compared to peer countries, and the tax structure would benefit from increased contributions by direct tax sources. Therefore, there is an immediate need for advancing tax reforms and improve capacity and quality of tax administration. Broadening the tax bases, through review of exemptions, as well as review of tax rates might be venues to consider. Additional revenues will create the much-needed fiscal space to increase funding for operations and maintenance for service delivery, and support fiscal sustainability. As a follow-up to this Public Expenditure Review, the Government of Ethiopia has asked the World Bank to provide further analytical support, with a view to enhance domestic revenue mobilization through simpler and more efficient taxation, while retaining equity priorities in public finances.
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From 1999 to 2011 Sudan had a period where it benefited from extensive discoveries of natural wealth through oil. But the oil economy had also clear symptoms of Dutch disease.
... See More + Agriculture suffered from neglect, and there were urgent calls to invest natural resource rents into economic diversification efforts. Relief to Sudan’s external debt crisis will be critical. The country economic memorandum (CEM) starts out with a series of simulations and a review of recent key literature on growth and diversification with the aim of defining a suitable approach for growth and diversification for Sudan. The sectoral structure of Sudan’s economy shows the growing importance of agriculture, less importance of extractives, and relative stability of other sectors (manufacturing, services) by 2030. Looking at other economies that were successful in their diversification efforts shows that they were able to broaden their endowments base by maximizing a triad of institutions to deliver services that ultimately increase productivity. The CEM finds that there is a case for Sudan to approach growth through diversification from two angles: the production and the endowment base, both of which rely on the effective utilization of key institutions. This analysis therefore uses a sectoral focus and looks at agriculture as sources for diversification, but also makes the case that trading of goods and services - especially of the higher value-added kind - can be a means to grow the endowment base of the country.
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From 1999 to 2011 Sudan had a period where it benefited from extensive discoveries of natural wealth through oil. But the oil economy had also clear symptoms of Dutch disease.
... See More + Agriculture suffered from neglect, and there were urgent calls to invest natural resource rents into economic diversification efforts. Relief to Sudan’s external debt crisis will be critical. The country economic memorandum (CEM) starts out with a series of simulations and a review of recent key literature on growth and diversification with the aim of defining a suitable approach for growth and diversification for Sudan. The sectoral structure of Sudan’s economy shows the growing importance of agriculture, less importance of extractives, and relative stability of other sectors (manufacturing, services) by 2030. Looking at other economies that were successful in their diversification efforts shows that they were able to broaden their endowments base by maximizing a triad of institutions to deliver services that ultimately increase productivity. The CEM finds that there is a case for Sudan to approach growth through diversification from two angles: the production and the endowment base, both of which rely on the effective utilization of key institutions. This analysis therefore uses a sectoral focus and looks at agriculture as sources for diversification, but also makes the case that trading of goods and services - especially of the higher value-added kind - can be a means to grow the endowment base of the country.
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From 1999 to 2011 Sudan had a period where it benefited from extensive discoveries of natural wealth through oil. But the oil economy had also clear symptoms of Dutch disease.
... See More + Agriculture suffered from neglect, and there were urgent calls to invest natural resource rents into economic diversification efforts. Relief to Sudan’s external debt crisis will be critical. The country economic memorandum (CEM) starts out with a series of simulations and a review of recent key literature on growth and diversification with the aim of defining a suitable approach for growth and diversification for Sudan. The sectoral structure of Sudan’s economy shows the growing importance of agriculture, less importance of extractives, and relative stability of other sectors (manufacturing, services) by 2030. Looking at other economies that were successful in their diversification efforts shows that they were able to broaden their endowments base by maximizing a triad of institutions to deliver services that ultimately increase productivity. The CEM finds that there is a case for Sudan to approach growth through diversification from two angles: the production and the endowment base, both of which rely on the effective utilization of key institutions. This analysis therefore uses a sectoral focus and looks at agriculture as sources for diversification, but also makes the case that trading of goods and services - especially of the higher value-added kind - can be a means to grow the endowment base of the country.
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The Ethiopian economy continued its strong expansion in FY14 with real GDP growing by 10.3 percent. Growth was driven mainly by the services sector from the supply side and public investment from the demand side.
... See More + At the same time, inflation has remained in single digits for the last two years on account of tighter monetary policy and lower international commodity prices. However, in recent months in 2015, domestic food prices are increasing partially as a result of shortage rainfall during the short rainy season. On the fiscal side, the budgetary stance at the general government level has been cautious. In an effort to adjust for the rising cost living, the FY15 budget incorporates an increase in public sector salaries after years of no increases which could also be the first step to adjust the balance between capital and recurrent expenditure. The salary increase accompanied by a supplementary budget in the middle of the fiscal year could potentially increase the budget deficit. The current account balance weakened. The deterioration is on account of a worsening trade deficit which was driven by weak export performance and large imports of capital goods for public investment programs. Goods exports showed positive growth in 2013-14 but rates remained far below their historical growth; furthermore, export growth fell into negative territory again in the last quarter of 2014 and first quarter of 2015. The strong economic growth in the past decade helped to reduce poverty significantly. The poverty headcount, measured by the national poverty line, fell from 38.7 percent in 2005 to 29.67 percent in 2011. Measured with the international poverty line (US$1.25 per day) Ethiopia saw the second fastest rate of reduction in Africa. Economic growth, particularly in agriculture, has been an important driver of poverty reduction in the last decade. Favorable weather conditions and improving terms of trade for rural producers have been reasons of this past trend supported by strong improvements in access to basic services and rural safety nets. Low levels of inequality have been maintained with the Gini coefficient remaining stable at 0.30.
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This report offers five policy recommendations that could contribute to the attraction of manufacturing FDI in Africa. To further the benefits of FDI, especially in the manufacturing sector, policymakers in Africa should: First, manage FDI flows and FDI-related policies in a way that maximizes spillovers in host countries.
... See More + Second, realize the emergence of FDI from newpartners, especially in manufacturing FDI, and establish platforms that help in the attraction ofnew FDI. Third, increase investment on key infrastructure to overcome constraints for manufacturing activities to develop, especially in power supply and transportation and logistics services. Fourth, take better advantage of the currently dominating market-seeking manufacturing FDI to improve the weak industry base in the shortterm. Market-seeking FDI has a sizeable positivecontribution to the host economy. Fifth, strengthen the linkages between domestic material input and foreign manufacturing investment.
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The Diagnostic Trade Integration Study (DTIS) update identifies priority actions in support of the Government of Sudan (GOS) commitment to increase trade and diversify the economy.
... See More + The current study builds on the earlier 2008 DTIS by identifying the major factors holding back the increase of agricultural exports and economic diversification. The report identifies a package of measures that will support Sudan to more effectively realize its economic potential. The DTIS Update presents an updated action matrix that summarizes the recommended policy reforms. This matrix was validated with a wide variety of stakeholders in Khartoum in September 2014. Together, the action points will contribute to reducing trade costs, thereby enabling Sudanese enterprises and farmers to compete more successfully in regional and global markets and realize the GOS objectives of expanding and diversifying exports for increased economic growth. The recommendations accept that any changes in tariff schedules should be ‘revenue neutral,’ given the existing challenging fiscal situation.
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Sudan has the potential to become a dynamic economy and a bread basket for the Arab world and East-Central Africa. However, resource endowment is not sufficient to bring about sustainable growth and prosperity.
... See More + Sudan's macroeconomic conditions remain weak since the secession of South Sudan in 2011, despite some improvements. The repercussions of the secession of South Sudan present enormous challenges for Sudan with respect to managing the macro-fiscal adjustment and promoting a structural re-orientation of the economy. The signing in March 2013 of the implementation matrix of the agreement between Sudan and South Sudan provides some fresh financial relief to Sudan and creates a great opportunity for further policy reforms to address the post-secession challenges. Sudan's growth strategy should involve policies aimed at improving the investment climate and broadening private sector-led growth, and diversifying the economy toward non-oil sectors such as agriculture, industry, export, and local trade.
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Sudan has the potential to become a dynamic economy and a bread basket for the Arab world and East-Central Africa. However, resource endowment is not sufficient to bring about sustainable growth and prosperity.
... See More + Sudan's macroeconomic conditions remain weak since the secession of South Sudan in 2011, despite some improvements. The repercussions of the secession of South Sudan present enormous challenges for Sudan with respect to managing the macro-fiscal adjustment and promoting a structural re-orientation of the economy. The signing in March 2013 of the implementation matrix of the agreement between Sudan and South Sudan provides some fresh financial relief to Sudan and creates a great opportunity for further policy reforms to address the post-secession challenges. Sudan's growth strategy should involve policies aimed at improving the investment climate and broadening private sector-led growth, and diversifying the economy toward non-oil sectors such as agriculture, industry, export, and local trade.
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Over the past decade, Ethiopia has achieved high economic growth, averaging 10.7 percent per year. In 2012, Ethiopia was the 12th fastest growing economy in the World.
... See More + If the country can continue its historically impressive growth performance, it could potentially reach middle income status by 2025. This, in turn, may require an adjustment in economic policy to phase in the private sector as an additional engine of growth. Moreover, Ethiopia needs to make progress on two related important fronts: enhancing domestic savings, and, resolving the bottlenecks of the trade logistics system. This Second Ethiopia economic update, prepared in collaboration with the Government of Ethiopia, offers policy guidance on how to move forward. Chapter one discusses Ethiopia's growth strategy, which emphasizes a strong expansion of public investment. This model has delivered impressive results, although the underlying macro policy mix highlights important challenges going forward suggesting that an adjustment to strategy may be warranted. One policy challenge relates to raising sufficient domestic savings to finance one of the highest public investment rates in the world, as discussed in chapter two. Another challenge relates to strengthening the competitiveness of the economy, to boost the lagging export performance, and attract foreign direct investment. Ethiopia's trade logistics system is a key constraint in this regard, as highlighted in chapter three.
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This brief takes a detailed look at Sudan's 2013 budget, with three key aims: (i) to provide a reality check of the macro assumptions underlying the budget; (ii) to assess the structure of the expenditure and how it relates to the policy targets stated in the three-year salvation economic program (2011-2013); and (iii) to evaluate the potential impact for the budget of oil fees and transitional financing assistance (TFA), expected from South Sudan, in overcoming shortcomings in the budget as currently planned.
... See More + Insights into these issues are particularly relevant for the preparation of a possible amended 2013 budget, which might be required given the March 2013 agreement between Sudan and South Sudan. The repercussions of the secession of South Sudan present important challenges for Sudan's budget process with respect to managing the macro-fiscal adjustment and promoting a structural re-orientation of the economy. The analysis in this brief indicates that the 2013 budget falls short in taking credible corrective macroeconomic measures to respond to the oil revenue shock and to encourage the revival in the non-oil sector. The implementation of the agreement with South Sudan will help the budget situation in 2013. Based on South Sudan's production projections for 2013, it is estimated that the inflow of funding from South Sudan to Sudan for the second half of 2013 will be around Sudanese pound (SDG )1.7 billion (SDG 0.7 billion for transit fees and SDG 1 billion for TFA). The budget optimistically assumes that the bulk of the deficit will be financed by domestic borrowing (72 percent of the total fiscal deficit), largely due to limited access to external financing. However, given the fragile domestic market sentiment due to economic uncertainties, the fiscal reliance on monetized financing is likely to increase in 2013, offsetting the price stability targeting and fueling inflation over the short and medium-term.
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This brief takes a detailed look at Sudan's 2013 budget, with three key aims: (i) to provide a reality check of the macro assumptions underlying the budget; (ii) to assess the structure of the expenditure and how it relates to the policy targets stated in the three-year salvation economic program (2011-2013); and (iii) to evaluate the potential impact for the budget of oil fees and transitional financing assistance (TFA), expected from South Sudan, in overcoming shortcomings in the budget as currently planned.
... See More + Insights into these issues are particularly relevant for the preparation of a possible amended 2013 budget, which might be required given the March 2013 agreement between Sudan and South Sudan. The repercussions of the secession of South Sudan present important challenges for Sudan's budget process with respect to managing the macro-fiscal adjustment and promoting a structural re-orientation of the economy. The analysis in this brief indicates that the 2013 budget falls short in taking credible corrective macroeconomic measures to respond to the oil revenue shock and to encourage the revival in the non-oil sector. The implementation of the agreement with South Sudan will help the budget situation in 2013. Based on South Sudan's production projections for 2013, it is estimated that the inflow of funding from South Sudan to Sudan for the second half of 2013 will be around Sudanese pound (SDG )1.7 billion (SDG 0.7 billion for transit fees and SDG 1 billion for TFA). The budget optimistically assumes that the bulk of the deficit will be financed by domestic borrowing (72 percent of the total fiscal deficit), largely due to limited access to external financing. However, given the fragile domestic market sentiment due to economic uncertainties, the fiscal reliance on monetized financing is likely to increase in 2013, offsetting the price stability targeting and fueling inflation over the short and medium-term.
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Sudan's economy is at a historic crossroads. For the last decade, oil exports have fuelled strong economic growth: by 2010 the economy was more than twice the size it had been in 1999.
... See More + But following South Sudan's secession in 2011, oil production has fallen by three quarters, revenues have more than halved and the economy is in recession. Looking back at the oil boom of 1999-2010, Sudan missed a chance to build the foundations of a vibrant non-oil economy. The present serious economic crisis was triggered by the secession of South Sudan, and the associated loss of oil revenues and foreign exchange earnings, but has its roots in the unbalanced policies of the oil boom period. Faced with the crisis, the government adopted, after some delays, painful, but necessary, fiscal and exchange rate policies. Looking forward, the shock of secession represents a unique opportunity to adopt economic and development policies that will rebalance Sudan's economy towards job-creating growth sectors. Sudan has now come to the end of a decade-long oil boom that lasted from 1999 to 2010. Looking forward, Sudan needs to learn the lessons from the past decade: revenues from natural resource activities must be channeled into public savings. In this way, the federal and state governments could play a critical role in putting the economy onto a more sustainable growth path. To achieve sustainable long-term economic development, Sudan must develop a strategy to invest its remaining resource revenues in alternative forms of capital. Gold exports may play a role in the transition to a more diversified economy, especially to finance temporary funding shortfalls.
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Sudan's economy is at a historic crossroads. For the last decade, oil exports have fuelled strong economic growth: by 2010 the economy was more than twice the size it had been in 1999.
... See More + But following South Sudan's secession in 2011, oil production has fallen by three quarters, revenues have more than halved and the economy is in recession. Looking back at the oil boom of 1999-2010, Sudan missed a chance to build the foundations of a vibrant non-oil economy. The present serious economic crisis was triggered by the secession of South Sudan, and the associated loss of oil revenues and foreign exchange earnings, but has its roots in the unbalanced policies of the oil boom period. Faced with the crisis, the government adopted, after some delays, painful, but necessary, fiscal and exchange rate policies. Looking forward, the shock of secession represents a unique opportunity to adopt economic and development policies that will rebalance Sudan's economy towards job-creating growth sectors. Sudan has now come to the end of a decade-long oil boom that lasted from 1999 to 2010. Looking forward, Sudan needs to learn the lessons from the past decade: revenues from natural resource activities must be channeled into public savings. In this way, the federal and state governments could play a critical role in putting the economy onto a more sustainable growth path. To achieve sustainable long-term economic development, Sudan must develop a strategy to invest its remaining resource revenues in alternative forms of capital. Gold exports may play a role in the transition to a more diversified economy, especially to finance temporary funding shortfalls.
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Since 2004 (Ethiopian Fiscal Year (EFY) 1997), Ethiopia has experienced strong and generally broad-based real economic growth of around 10.6 percent on average between then and 2011.
... See More + Growth over the last nine years was far beyond the growth rates recorded in aggregate terms for Sub-Saharan Africa (SSA), which on average only reached 5.2 percent, less than half of Ethiopia's average real gross domestic product (GDP) growth rate during that period. Inspired by the East Asian experiences for a comparison of selected indicators and policies of Ethiopia and China/Korea), growth was induced through a mix of factors including agricultural modernization, the development of new export sectors, strong global commodity demand, and government-led development investments. The initial double digits growth rates have now manifested slightly lower but remain at high single-digit levels. The economy is expected to stabilize at around seven to eight percent in 2012, largely owing to improved performance in the agriculture sector. GDP growth is likely to stay around that margin up until 2016 (EFY 2008) driven by rising foreign investment and exports (Economist Intelligence Unit 2012). High inflation persists, but is on a slightly decreasing trend. Economic growth brought with it positive trends in reducing poverty, in both urban and rural areas. Ethiopia follows a strategy of increasing exports to facilitate growth. This is appropriate given the currently limited size of its domestic market and it is consistent with the development experience of some of the recently successful countries, particularly in East Asia. Export of goods growth is to a good extent driven by volume growth across a variety of product groups, which indicates that this growth is a result of recent efforts to increase and diversify the export base. Overall export and import developments result in a significantly increased trade deficit by 43 percent, up from US$5.5 billion in 2010/11 to US$7.9 billion.
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Chinese Foreign Direct Investment (FDI) into Africa is on the rise and Ethiopia is at the forefront of this trend. On request of the Government, the World Bank surveyed 69 Chinese enterprises doing business in Ethiopia with a 95-question survey in May/June 2012.
... See More + The survey covered various aspects of the foreign direct investment climate in Ethiopia, including infrastructure, sales and supplies, land, crime, competition, finance, human resources, and questions about general opportunities and constraints for doing business in Ethiopia. This report summarizes the results of survey and provides policy suggestions in light of the analysis; the report also provides some broader background of the expected benefits of FDI into Ethiopia as well as current policies and approaches to promote incoming investment. Addressing identified obstacles could help Ethiopia to take better advantage of foreign investors in order to accelerate the shift from a predominantly low-productivity agriculture-based economy towards a higher-productivity manufacturing and export-based economy. Experiences in successful countries around the world, and especially East Asia show that foreign investment is instrumental to facilitate such a structural transformation and to maintain sustained and broad-based economic development. This study recommends five main areas for policy adjustments to facilitate foreign investors coming into Ethiopia: adjust customs clearance procedures and trade regulations; facilitate currency convertibility and increase transparency of the exchange rate policy; improve tax administration consistency and efficacy; execute impartial labor regulation; and increase the supply and quality of skilled workers.
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